First, the bottom line: Policy uncertainty and heightened recession risk not yet apparent in jobs data
- Tariffs and policy uncertainty have buffeted consumer, investor, and business sentiment in recent months, but the labor market remains surprisingly resilient despite doubts about the near-term economic outlook.
- A trifecta of steady unemployment, solid job creation, and good wage growth all point to a labor economy that’s not yet bending against the backdrop of massive trade policy uncertainty.
- The unexpectedly firm April jobs report comes at an opportune time on the heels of a weaker-than-expected Q1 GDP report. Despite indications that more employers are reevaluating their hiring plans for the coming year, the negative mood didn’t notably curb hiring last month.
By the numbers: Surprisingly solid
- Job creation was stronger than expected in April, coming in at a solid 177,000, well above the consensus forecast of 135,000.
- However, revisions to the March and February data shaved 58,000 from previously reported payroll gains, blunting the magnitude of the monthly beat. On a net basis, job creation still modestly topped expectations. The three-month average gain of 155,000 is also indicative of solid underlying job creation.
- Unemployment was unchanged at 4.2% — a reading that’s consistent with a labor market at or near full employment, showing little slippage over the past year.
- Average hourly wage growth remained relatively firm at 3.8%, in line with the 12-month increase reported for March. While well off the cyclical high when job openings far outstripped the pool of available workers, wage gains remain well above the high end of its range during the decade leading up to the pandemic. Put simply, post-pandemic wage growth remains strong.
Broad thoughts: Recession risk is elevated but not yet obvious in jobs data
- There’s no question that the flurry of policy announcements coming out of Washington, D.C. have raised serious questions about the near-term path for the economy.
- The Trump administration’s upending of prior trade policy has thus far been the dominant theme, raising concerns about surging prices for a range of imported goods and the potential for shortages of some products in the coming months, as trans-Pacific shipping container volume has plummeted.
- In turn, what will these disruptions mean for an economy that contracted modestly in Q1? That remains to be seen, but real consumer spending growth is expected to falter. How much? That’s an open question as well, but the relative strength of the labor market and wage growth should underpin continued spending growth in the near term.
- The rapid escalation in the trade standoff shifted policy attention away from federal spending cuts administered by the Department of Government Efficiency (DOGE). While it’s unclear how many federal workers have been laid off since January, the range of estimates is quite broad, conservatively above 100,000.
- To this point, evidence of federal job cuts in unemployment claims and nonfarm payroll data has been limited. Initial jobless claims have edged higher, but only moderately. Further, job creation has remained solidly positive in recent months.
- The big question before investors and policymakers alike is whether the economy can sustain its recent momentum, with most expecting a soft patch in the near term, while hoping to avoid further slippage into recession. A more rapid resolution to the trade standoff (particularly with America’s largest trade partners) would help, but the tangible effect of higher prices over an extended period could be enough of a shock to tip the scales.
- The negative Q1 GDP print raises the stakes a bit, but underlying consumption was solid. How much Q1 consumption was boosted by consumers pulling forward spending in anticipation of higher prices will become more apparent in the next few months.
- A modestly negative GDP print alone isn’t recessionary but does signal that the risk is heightened. A considerable increase in the pace of layoffs, further erosion in job openings, and declining nonfarm payrolls — signs of broader weakness in labor conditions — would be expected. For now, at least, the labor economy hasn’t faltered.
- That’s good news for workers, but bad news for those hoping for the Fed to cut its policy rate in the near term. For now, Fed policymakers remain focused on the risk presented by elevated inflation and rising inflation expectations. It’ll take more than concerns about a potential recession and potential for unemployment to rise to push the Fed to cut rates.
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